Delphi Financial Group, Inc. (NYSE: DFG) announced today
operating earnings(1) of $48.7 million or $0.86 per diluted share
for the second quarter of 2011 compared to $43.8 million or $0.79
per share for the second quarter of 2010. Net income attributable
to shareholders was $49.4 million or $0.87 per diluted share,
compared to $34.7 million or $0.62 per share in the second quarter
of 2010.
Highlights for the second quarter include the following(2):
- Core premium income of $366.5 million,
an increase of 8.5% from the second quarter of 2010;
- Annuity sales of $149.0 million, an
increase of 90.9% from the second quarter of 2010;
- Total premium and fee income of $385.0
million, an increase of 9.2% from the second quarter of 2010;
- Combined ratio of 93.8%, a decrease of
80 basis points from the second quarter of 2010;
- Net investment income of $83.2 million,
an increase of 6.3% from the second quarter of 2010;
- Annualized operating return on
beginning shareholders’ equity in the second quarter of 2011 of
12.2%, compared to 12.9% in the second quarter of 2010;
- Diluted book value per share of $29.28
at June 30, 2011, up 14.2% from June 30, 2010.
Robert Rosenkranz, Chairman and Chief Executive Officer, said,
“Our financial results in the second quarter kept us on track to
meet Delphi’s targets for the year. We are pleased with this
performance, although investment results were somewhat below our
expectations. Operating earnings benefited from strong underwriting
margins in our insurance businesses. Reliance Standard’s modest
premium growth and lower production in the quarter reflect our
ongoing commitment to pricing and underwriting discipline. Safety
National continued to expand our market leadership position in the
excess workers’ compensation market and achieved robust growth in
assumed workers’ compensation reinsurance. This positive momentum
carried over into Safety National’s important July renewal period
in excess workers’ compensation, which is not included in second
quarter results, as we achieved high renewal ratios, strong new
production and solid increases in rates and self-insured
retentions.”
Mr. Rosenkranz added, “Delphi continues to maintain excellent
financial flexibility to support the growth of our insurance and
asset accumulation businesses, with shareholders’ equity at an
all-time high, debt to total capitalization of 16.9% and holding
company financial resources at a comfortable
$140 million.”
Group Employee Benefit Segment
Core group employee benefit premiums for the second quarter of
2011 were $366.5 million, up 8.5% from $337.7 million in the second
quarter of 2010. Core premiums at Delphi’s Safety National
subsidiary rose 16.6% while core premiums at Delphi’s Reliance
Standard Life subsidiary increased 5.9%. Core production in the
second quarter of 2011 rose 5.3%, with core production at Safety
National increasing 77.2% and core production at Reliance Standard
Life decreasing 7.9%.
Delphi’s group employee benefit combined ratio in the second
quarter of 2011 improved to 93.8% compared to 94.6% for the second
quarter of 2010 and 95.3% for the full year 2010. Delphi’s group
employee benefit loss ratio in the second quarter of 2011 improved
by 200 basis points over the fourth quarter of 2010, resulting from
the effect of better pricing and other actions taken to address
elevated long-term disability claims incidence experienced in the
second half of 2010.
Operating income for the group employee benefit segment for the
second quarter of 2011 was $73.1 million, an 11.9% increase from
$65.3 million in the second quarter of 2010.
Asset Accumulation Segment
Delphi’s asset accumulation segment, which is primarily focused
on individual fixed annuities, achieved new annuity sales of $149.0
million in the second quarter of 2011, an increase of 90.9% from
$78.0 million in the second quarter of 2010. The strong growth in
annuity sales reflected continued favorable market conditions in
Delphi’s wholesaler distribution channel. Funds under management at
June 30, 2011 were $1.9 billion, up from $1.5 billion at June 30,
2010.
Operating income for the asset accumulation segment was $9.6
million, a decrease of 14.9% from $11.3 million the second quarter
of 2010. Profitability was impacted by lower than expected
investment income.
Investments
Delphi’s net investment income in the second quarter of 2011 was
$83.2 million, a gain of 6.3% from $78.2 million in the second
quarter of 2010. Invested assets at June 30, 2011 were $7.0 billion
compared to $6.1 billion at June 30, 2010. The tax equivalent yield
on the Company’s investment portfolio in the second quarter of 2011
was 5.3% compared to 5.6% in the second quarter of 2010.
Investment income was impacted in the second quarter by the
challenging environment for fixed income securities, with interest
rates trending lower and spreads remaining tight. In addition,
returns from the Company’s alternative investments, which have
historically provided enhanced investment income and reduced
overall portfolio volatility, were essentially flat in the
quarter.
Delphi reported after-tax net realized investment gains in the
second quarter of 2011 of $0.7 million, including
other-than-temporary impairments (“OTTI”) of $(3.5) million,
compared with after-tax net realized investment losses of $(9.0)
million, including OTTI of $(13.5) million, in the same quarter a
year ago.
Capitalization and Shareholders’ Equity
Shareholders’ equity at June 30, 2011 increased 17% to a record
$1.7 billion from $1.4 billion at June 30, 2010. Diluted book value
per share reached a record $29.28 at June 30, 2011, up 14.2% from
$25.64 at June 30, 2010.
Total capitalization at June 30, 2011 was $2.2 billion,
including $375 million of corporate debt and $175 million of junior
subordinated debentures.
Conference Call
On July 27, 2011 at 11:00 AM (Eastern time), Delphi will
broadcast the Company’s second quarter 2011 earnings teleconference
live on the Internet, hosted by Robert Rosenkranz, Chairman and
Chief Executive Officer. Investors can access the broadcast at
www.delphifin.com by clicking on the webcast icon on the home page.
It is advisable to register at least 15 minutes prior to the call
to download and install any necessary audio software. The online
replay will be available on Delphi’s website for one week beginning
at approximately 1:00 PM (Eastern time) on July 27, 2011. Investors
can also download Delphi’s second quarter 2011 Financial Supplement
from the Company’s website at
www.delphifin.com/financial/stats11.html.
About Delphi Financial Group, Inc.
Delphi Financial Group, Inc. is a financial services company
focused on specialty insurance and insurance-related businesses.
Delphi is a leader in managing all aspects of employee absence to
enhance the productivity of its clients and provides the related
group insurance coverages: long-term and short-term disability,
life, excess workers’ compensation for self-insured employers,
large casualty programs including large deductible workers’
compensation, travel accident, dental and limited benefit health
insurance. Delphi’s asset accumulation business emphasizes
individual annuity products. Delphi’s common stock is listed on the
New York Stock Exchange under the symbol DFG and its corporate
website address is www.delphifin.com.
Cautionary Note Regarding Forward-Looking Statements
In connection with, and because it desires to take advantage of,
the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995, Delphi cautions readers regarding certain
forward-looking statements in the foregoing discussion and in any
other statements made by, or on behalf of, Delphi, whether in
future filings with the Securities and Exchange Commission or
otherwise. Forward-looking statements are statements not based on
historical information and which relate to future operations,
strategies, financial results, prospects, outlooks or other
developments. Some forward-looking statements may be identified by
the use of terms such as “expects,” “believes,” “anticipates,”
“intends,” “judgment,” “outlook,” “effort,” “attempt,” “achieve,”
“project,” or other similar expressions. Forward-looking statements
are necessarily based upon estimates and assumptions that are
inherently subject to significant business, economic, competitive
and other uncertainties and contingencies, many of which are beyond
Delphi’s control and many of which, with respect to future business
decisions, are subject to change. Examples of such uncertainties
and contingencies include, among other important factors, those
affecting the insurance industry generally, such as the economic
and interest rate environment, federal and state legislative and
regulatory developments, including but not limited to changes in
financial services, employee benefit and tax laws and regulations,
changes in accounting rules or interpretations thereof, market
pricing and competitive trends relating to insurance products and
services, acts of terrorism or war, and the availability and cost
of reinsurance, and those relating specifically to Delphi’s
business, such as the level of its insurance premiums and fee
income, the claims experience, persistency and other factors
affecting the profitability of its insurance products, the
performance of its investment portfolio and changes in Delphi’s
investment strategy, acquisitions of companies or blocks of
business, and ratings by major rating organizations of Delphi and
its insurance subsidiaries. These uncertainties and contingencies
can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements
made by, or on behalf of, Delphi. Forward-looking statements
contained in the foregoing discussion are made as of the date of
this press release and Delphi disclaims any obligation to update
these or any other forward-looking statements.
Non-GAAP Financial Measures
In presenting the Company’s financial results, management has
included and discussed certain financial measures that are not
calculated under standards or rules that comprise U.S. GAAP. Such
measures are referred to as non-GAAP. These measures should not be
viewed as a substitute for those determined in accordance with U.S.
GAAP. These non-GAAP financial measures are used by Delphi
management in the management of its operations. Management of
Delphi believes that showing these non-GAAP financial measures
enables investors, analysts, rating agencies and other users of its
financial information to more easily analyze Delphi’s results of
operations in a manner similar to how management analyzes Delphi’s
underlying performance.
Operating earnings, which is a non-GAAP financial measure,
consists of net income attributable to shareholders excluding
after-tax realized investment gains and losses, losses on early
retirement of senior notes and results from discontinued
operations, as applicable. The Company believes that because these
excluded items arise from events that are largely within
management’s discretion and whose fluctuations can distort
comparisons between periods, a measure excluding their impact is
useful in analyzing the Company's operating trends. Investment
gains or losses are realized based on management’s decision to
dispose of an investment, and investment losses are realized based
on management’s judgment that a decline in the market value of an
investment is other than temporary. Early retirement of senior
notes occurs based on management’s decision to redeem or repurchase
these notes. Discontinued operations result from management’s
decision to exit or sell a particular business. Thus, these
excluded items are not reflective of the Company’s ongoing earnings
capacity, and trends in the earnings of the Company’s underlying
insurance operations can be more clearly identified without their
effects. For these reasons, management uses the measure of
operating earnings to assess performance and make operating plans
and decisions, and the Company believes that analysts and investors
typically utilize measures of this type as one element of their
evaluations of insurers’ financial performance. However, gains or
losses from the excluded items, particularly as to investments, can
occur frequently and should not be considered as nonrecurring
items. Further, operating earnings should not be considered a
substitute for net income attributable to shareholders, the most
directly comparable GAAP measure, as an indication of the Company’s
overall financial performance and may not be calculated in the same
manner as similarly titled captions in other companies’ financial
statements. For reconciliations of the amounts of operating
earnings to the corresponding amounts of net income attributable to
shareholders for the indicated periods, see the table captioned
“Non-GAAP Financial Measures – Reconciliation to GAAP” which
follows.
Annualized operating return on beginning shareholders’ equity,
which is a non-GAAP financial measure, is based on operating
earnings divided by beginning shareholders’ equity. For
reconciliations of the amounts of annualized operating return on
equity to the corresponding amounts of annualized net income return
on equity for the indicated periods, see the table captioned
“Non-GAAP Financial Measures – Reconciliation to GAAP” which
follows.
(1) Information regarding this and other non-GAAP financial
measures included in this press release is contained under
“Non-GAAP Financial Measures” above. (2)
In October 2010, the FASB issued guidance
limiting the extent to which an insurer may capitalize costs
incurred in the acquisition of an insurance contract. The guidance
provides that, in order to be capitalized, such costs must be
incremental and directly related to the acquisition of a new or
renewal insurance contract. Insurers may only capitalize costs
related to successful efforts in attaining a contract and
advertising costs may only be capitalized if certain direct
response advertising criteria are met. This guidance is effective
for interim and annual reporting periods beginning after December
15, 2011, with either prospective or retrospective adoption
permitted. Effective January 1, 2011, Delphi elected to adopt this
guidance on a retrospective basis, which resulted in the write-off
of the portion of its cost of business acquired that does not
satisfy the standards for being capitalized under such guidance, as
well as the restatement of certain of Delphi’s financial
information for prior periods. Accordingly, the 2010 financial
information has been restated to reduce operating earnings per
share for the second quarter of 2010 by $0.04, and to reduce
diluted book value per share at June 30, 2010 by $1.10. Detailed
financial data concerning these matters is contained in the
Company’s Second Quarter 2011 Financial Supplement, which is
available on the Company’s website at
www.delphifin.com/financial/stats11.html.
DELPHI FINANCIAL GROUP, INC.
Non-GAAP Financial Measures Reconciliation to GAAP
(Unaudited; in thousands, except per share data)
Three Months Ended Six Months Ended 06/30/2011
06/30/2010 06/30/2011 06/30/2010
Income Statement
Data
Operating earnings $ 48,697 $ 43,818 $ 100,203 $
90,153 Net realized investment gains (losses) (A) 730 (9,018 ) (552
) (18,837 ) Loss on early retirement of senior notes (B) -
(138 ) - (138 )
Net
income attributable to shareholders (GAAP measure) $ 49,427
$ 34,662 $ 99,651 $ 71,178
Diluted results per share of common stock attributable to
shareholders: Operating earnings $ 0.86 $ 0.79 $ 1.76 $
1.62 Net realized investment gains (losses) (A) 0.01 (0.17 ) (0.01
) (0.34 ) Loss on early retirement of senior notes (B) -
(0.00 ) - (0.00 )
Net
income attributable to shareholders (GAAP measure) $ 0.87
$ 0.62 $ 1.75 $ 1.28
Annualized operating return on beginning shareholders'
equity 12.2 % 12.9 % 13.1 % 13.9 %
Annualized net
income return on beginning shareholders' equity (GAAP measure)
12.4 % 10.2 % 13.0 % 11.0 %
(A) Net of an income tax expense (benefit)
of $0.4 million, $(4.9) million, $(0.3) million, $(10.1) million,
or $0.01 per diluted share, $(0.09) per diluted share, $(0.01) per
diluted share, $(0.18) per diluted share for the three and six
months ended 06/30/2011 and 06/30/2010, respectively. The tax
effect is calculated using the Company's statutory tax rate of
35%.
(B) Net of an income tax benefit of $0.07
million or $0.00 per diluted share for the three and six months
ended 06/30/2010. The tax effect is calculated using the Company's
statutory tax rate of 35%.
Balance Sheet
Data
6/30/2011 12/31/2010
Shareholders' equity, excluding accumulated other comprehensive
income $ 1,596,205 $ 1,499,564 Add: Accumulated other
comprehensive income 78,231 30,932
Shareholders' equity (GAAP measure) $ 1,674,436
$ 1,530,496
Diluted book value per share of
common stock, excluding accumulated other comprehensive income
$ 28.00 $ 26.57 Add: Accumulated other comprehensive income
1.28 0.52
Diluted book value per
share of common stock (GAAP measure) $ 29.28 $ 27.09
DELPHI FINANCIAL GROUP, INC. Consolidated
Statements of Income
Total Operations
(Unaudited; in thousands, except per
share data)
Three Months Ended Six Months Ended 06/30/2011 06/30/2010
06/30/2011 06/30/2010 Revenue: Premium and fee income $ 385,012 $
352,566 $ 761,411 $ 700,329 Net investment income 83,191 78,234
175,485 162,284 Net realized investment gains (losses): Total other
than temporary impairment losses (7,775 ) (21,659 ) (15,314 )
(48,932 )
Less: Portion of other than temporary
impairment losses recognized in other comprehensive income
2,432 826 953
5,101 Net impairment losses recognized in earnings (5,343 )
(20,833 ) (14,361 ) (43,831 ) Other net realized investment gains
6,466 6,959 13,512
14,851 Net realized investment gains (losses) 1,123 (13,874
) (849 ) (28,980 ) Loss on early retirement of senior notes
- (212 ) - (212 ) Total revenue
469,326 416,714 936,047
833,421 Benefits and expenses: Benefits,
claims and interest credited to policyholders 273,163 244,687
544,428 491,008 Commissions and expenses 121,137
116,460 240,575 229,789
394,300 361,147 785,003
720,797 Operating income 75,026 55,567 151,044
112,624 Interest expense: Corporate debt 6,007 8,264 12,017
15,587 Junior subordinated debentures 3,248 3,248 6,490 6,489
Income tax expense 15,762 9,385
32,157 19,297 Net income 50,009 34,670 100,380
71,251 Less: Net income attributable to noncontrolling
interest 582 8 729
73 Net income attributable to shareholders $ 49,427
$ 34,662 $ 99,651 $ 71,178
Basic results per share of common stock: Net income
attributable to shareholders $ 0.88 $ 0.63 $ 1.78 $ 1.29
Weighted average shares outstanding 56,091 55,287 56,006 55,224
Diluted results per share of common stock: Net income
attributable to shareholders $ 0.87 $ 0.62 $ 1.75 $ 1.28
Weighted average shares outstanding 56,868 55,765 56,801 55,611
Dividends paid per share of common stock $ 0.12 $ 0.10 $
0.23 $ 0.20
DELPHI FINANCIAL GROUP, INC.
SUMMARIZED CONSOLIDATED BALANCE SHEETS (Unaudited; in
thousands) 06/30/2011 12/31/2010
Assets: Investments: Fixed maturity securities, available for sale
$ 6,181,482 $ 5,717,090 Short-term investments 228,486 334,215
Other investments 614,180 498,678
7,024,148 6,549,983 Cash 90,271 72,806 Cost of business
acquired 140,872 149,325 Reinsurance receivables 357,010 360,255
Goodwill 93,929 93,929 Other assets 337,274 311,577 Assets held in
separate account 126,213 123,674
Total assets $ 8,169,717 $ 7,661,549
Liabilities and Equity: Policy liabilities and accruals $ 3,098,737
$ 2,970,389 Policyholder account balances 1,884,029 1,753,744
Corporate debt 375,000 375,000 Junior subordinated debentures
175,000 175,000 Other liabilities and policyholder funds 830,157
728,612 Liabilities related to separate account 126,213
123,674 Total liabilities
6,489,136 6,126,419 Equity: Class A
Common Stock 567 565 Class B Common Stock 60 60 Additional paid-in
capital 692,696 682,816 Accumulated other comprehensive income
78,231 30,932 Retained earnings 1,100,128 1,013,369 Treasury stock,
at cost (197,246 ) (197,246 ) Total shareholders'
equity 1,674,436 1,530,496 Noncontrolling interest 6,145
4,634 Total equity 1,680,581 1,535,130
Total liabilities and equity $ 8,169,717 $ 7,661,549
DELPHI FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited; in
thousands) Six Months Ended 06/30/2011 06/30/2010
Operating activities: Net income attributable to shareholders $
99,651 $ 71,178
Adjustments to reconcile net income
attributable to shareholders to net cash provided by operating
activities:
Change in policy liabilities and policyholder accounts 149,619
84,646 Net change in reinsurance receivables and payables (4,016 )
(11,574 ) Amortization, principally the cost of business acquired
and investments 16,626 24,624 Deferred costs of business acquired
(45,230 ) (34,273 ) Net realized losses on investments 849 28,980
Net change in federal income taxes 25,534 (5,473 ) Other
(45,373 ) (25,398 ) Net cash provided by operating
activities 197,660 132,710
Investing activities: Purchases of investments and loans made
(1,574,882 ) (936,660 ) Sales of investments and receipts from
repayment of loans 1,002,719 494,984 Maturities of investments
171,331 176,718 Net change in short-term investments 105,729 55,689
Change in deposit in separate account - (2,965
) Net cash used by investing activities (295,103 )
(212,234 ) Financing activities: Deposits to policyholder
accounts 252,096 122,809 Withdrawals from policyholder accounts
(129,235 ) (54,905 ) Proceeds from issuance of 2020 Senior Notes -
250,000 Principal payments under bank credit facility - (222,000 )
Early retirement of senior notes - (5,000 ) Cash dividends paid on
common stock (12,892 ) (11,054 ) Other financing activities
4,939 2,095 Net cash provided by financing
activities 114,908 81,945
Increase in cash 17,465 2,421 Cash at beginning of year
72,806 65,464 Cash at end of period $ 90,271
$ 67,885
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